Tag: budget

Yesterday, the administration announced its intention to give Metro employees their overdue cost of living pay raise in the upcoming budget. I fully support that. But I think the Metro Council needs to hold back on any congratulatory high fives until the Mayor presents his budget in late April. For now, we don’t have any idea about how this is being accomplished.

The press release announcing the pay raise said that revenue is increasing. But, that’s sort of a given. The question is how much is it increasing? As data points, remember that the biggest revenue increases ever (without a tax increase) were several years ago and were in the range of $120 million. At the time, this was described as extraordinary. And during last year’s budget season, Metro Finance conservatively estimated that revenue growth for the upcoming fiscal year (FY20) would be about $65 million. For the sake of argument, let’s assume that FY20 revenue growth will be somewhere between Metro Finance’s conservative $65 million estimate and the all time record of about $120 million.

Let’s move on and consider what that new revenue will buy. My starting point is the information that Metro Finance gave us last budget season (so, that’s 9-10 months ago). We were told that certain FY20 increases in expenses were unavoidable:

Replace one-time sales built into the FY19 budget, $38 million

Known long term debt increases for FY20, $42.6 million

Pay plan for FY20, $24.4 million

Inflation (1.8%) for General Fund for FY20, $20.1 million

Inflation (1.8%) for Schools Fund for FY20, $16.8 million

This means that less than a year ago, Metro Finance expected a total to $142.7 million of new obligations in FY20. Even if we were to pretend there is no inflation, the total is $105.8 million of new obligations for FY20 according to Metro Finance’s numbers last year.

So, when the press release yesterday said that revenue is increasing…well, let’s hope that the projected revenue increase of $65 million was very, very low. Otherwise, the pay plan promise the Mayor made yesterday doesn’t add up.

The bottom line is that you can’t tighten your belt and promise new spending unless something really magical has happened with the city’s revenue (or you keep selling off Metro assets to make ends meet).

NOTES: All the numbers used here came from Metro Finance. My various posts with these numbers from last budget season are here. Also, I wrote this quickly because I need to be in court for a client shortly. Please excuse any typos.

At the Council Budget & Finance Committee yesterday, the administration gave an extended description of how beneficial Amazon will be for Metro. The numbers were flying so fast, and (so far) not supported by any documentation, and it was hard to keep up. But the gist of the administration’s argument is that there will be many tens of millions of dollars of financial benefit to Metro because Amazon is coming to town and, therefore, the $500 per job proposed incentive is a no-brainer.

I pushed back on that…and that got some twitter coverage:

CM @mendesbob calls the idea that the Amazon hub would generate more property taxes "ludicrous," noting that Nashville Yards was already under construction before the Amazon announcement. "Nashville Yards is getting built anyway."

For context, remember during transit when the core foundation of the argument in favor of the referendum was “a gazillion people are going to move here in the next 20 years…so we better do whatever it takes to accommodate them.” Compare that to now when 5,000 of those gazillion are in fact going to move here in the next 2 to 7 years. Now, the argument is “these 5,000 people are going to create a huge amount of new property tax, sales tax, and personalty tax revenue that we really need and want, so let’s pay them an incentive.”

I view the claim that the 5,000 will create enormous new revenue that Nashville could never otherwise obtain to be false, or at least a half-truth. If someone wants to make the argument that Amazon is bringing Nashville a certain amount of new revenue more quickly than we would otherwise get it, I am all ears. But when you figure the value of them moving here, you just can’t count ALL of the revenue they create — we should only be counting revenue that we would not get in some other way.

As an example, let’s talk about property tax revenue. I feel confident that the owners of Nashville Yards fully intended to build a building on the Amazon site sometime in the next 5-7 years, at the latest. Now with Amazon coming to town, the building might be built in 3 years. So, I am open to a discussion about the value to Nashville to getting the property tax revenue for those extra 2-4 years. But don’t tell me that ALL the property tax revenue for the rest of time is due to Amazon coming to town.

Like most everyone, I’m glad that Amazon has chosen Nashville. We need a fully honest discussion of the economic benefit. Not pie in the sky overblown statistics.

There’s a tax increment financing reform bill (BL2018-1319) on 3rd and final reading next week. The bill is here. Council Director Jameson’s analysis is here. My prior posts about -1319 are here and here. It might also be useful to read this about the issues from the proposed Donelson transit-oriented development that fell just a few votes short of passing in August.

The summary is that -1319 would re-balance how much of new property tax revenue from redevelopment districts is used to pay development loans versus how much is used for Metro’s operating budget. In 2016, the Council passed a bill to have Metro withhold “debt services taxes” from new TIF loans. So, since 2016, for new TIF loans, Metro has been required to set aside about 15% of property tax revenues from the new TIF projects to pay for Metro’s own long term debt. This has left the other 85% of new tax revenue being available to pay development loans. I know everyone would agree that this 2016 law hasn’t created the slightest speed bump to Nashville’s economy. Now, -1319 would expand on this principle so that Metro would also keep “schools fund taxes” for new TIF properties. This would expand the hold back from 15% to about 46% — with the other 54% still being available to pay development loans.

As Metro continues to look hard at radically expanding the use of tax increment financing in transit oriented development all across the city, it is critical that we have a balance between supporting development and paying for basic government functions.

Before -1319 passed unanimously on 2nd reading last week, two Council members asked why -1319 can’t wait until the recently passed tax increment financing study group completes its work (which should be late spring 2019). I responded by saying that, no matter what the study group comes up with, it will be important to re-balance how the new tax dollars are split between development loans and the operating budget. I still feel this way, but wanted to explore the objections of my two colleagues.

As a result, I negotiated with MDHA (through a lawyer they have working on this) for a TIF moratorium through June 30, 2019. We agreed that for that time there would be no new TIF loans (unless Council, MDHA, and the Mayor all agreed) and there would be no new redevelopment district legislation introduced. From my perspective, if I was being asked by some to hold off on -1319 while the study group does its work, then I would want to know that everyone’s pencils would be down and there would be no new loans and no new TIF district legislation while the study group does its work. MDHA agreed. But the Mayor’s office would not.

The clear implication is that there are plans in the works to introduce a new redevelopment district between now and June 30. Presumably, the intent is for this new redevelopment district to exist for decades into the future under today’s ground rules rather than a new set of ground rules. As a result of the Mayor’s office saying no, I expect:

MDHA will likely fall in line with the Mayor’s office and work against -1319 even though I had a compromise worked out with MDHA.

Some will argue that “well, this won’t actually get any more money for schools.” I haven’t yet figured out how this can possibly be. If you specifically hold back money for schools instead of development loans, then how can it not result in more money for schools??

Some will argue that -1391 will kill tax increment financing as a useful development tool. For those people, I’d note that taking out the 15% for debt services taxes a few years ago didn’t slow down the economy at all. And if -1319 passes, a majority of the tax revenue from new TIF properties would still be available for development loans. This isn’t anti-development by any means.

For this one, Metro Finance hasn’t always calculated the statistic the same way, and the statistic has not been published for all fiscal years.

I calculate this statistic by looking at the operating budget ordinance and dividing “Debt Services Funds” by “Net Appropriation By District.” For some years, this matches Metro Finance’s published number precisely. But for some, my calculation is a few tenths of a percent different than Metro Finance’s.

The purpose of a land bank is to save surplus real estate to be available for future affordable housing developments. Since the cost of land in Nashville is what makes affordability difficult, land banking is an important tool for affordable housing.

Affordable housing advocates in Nashville have been asking the city to form a land bank for some time. And most recently, Mayor Barry’s Transit & Affordability Taskforce recommended in its final report that Metro should “Use community land banks…to obtain and hold property for affordable housing needs.”

Unfortunately, the proposed Metro budget seems to be going in the opposite direction. Instead of saving surplus land for future development, the budget presented to the Council would sell $23 million of prime surplus property. This May 7 letter to the Council has all of the details that are currently available.

The three properties to be sold are Murrell School in Edgehill, the Green Hills Fire Station, and 3800 Charlotte. As you can tell from the projected $23 million sales price, this is desirable real estate in desirable locations. Instead of saving this land for future Metro needs or for future affordable housing developments, Metro is proposing to have a one-time sale to prop up its operating budget for the next fiscal year.

It is terrible policy to be selling surplus real estate to make ends meet for an annual operating budget. Just terrible.

Beyond this generally bad policy, there is some dark irony in the proposed budget for affordable housing advocates. According to page 22 of the Budget Presentation, the $10 million for the Barnes Fund this year will come from the one-time property sales proceeds!!! This means that the very surplus property in desirable locations that would be perfect to be banked for future use is being sold off to fund the Barnes Fund this year. So, no land banking and the Barnes Fund funding is contingent on one-time, non-recurring real estate sale proceeds. There’s no way to consider this as anything but a step backwards in Nashville’s commitment to affordable housing.

NOTE: Some will read this post along and conclude that I am an irresponsible tax and spend guy. Not so. As I have said in another post, in addition to properly funding the revenue side of its budget:

“I am confident that the Metro Council is going to reassess how economic incentives are judged and awarded. Most citizens believe that downtown has enough momentum to be self-sustaining and they would like to see more tax dollars spent in communities outside of downtown. Unfortunately, any reassessment and realignment like this won’t happen overnight or in a single year.

“In the short-term then, we must look at revenue and expenses and how to make ends meet while also honoring obligations to schools and employees.

“On the expense side, I expect that the Council will be proposing many cuts to many items in the upcoming budget. We are too early in the process for me to have an idea of what those cuts will be. However, I am certain that there is not enough fat in the budget to cut that would allow Metro to honor its school and employee obligations. We have to look at the revenue also. This has been true historically, and it is true now.”

For important background about the history of tax rates and property value reassessments, read this first. And also please read my May 11 post about this year’s budget. The central premise of that post was that the “Metro government botched the…resetting of property tax rates last year.”

The proposed budget for the upcoming Fiscal Year 2019 has been called a “status quo” budget. But it is alarmingly thin — especially when you consider that the budget crunch is expected to be worse a year from now. The proposed budget has these problems:

It funds our schools a full 5% less (about $39 million) than they have requested to educate the children of Davidson County.

It requires repealing the employee pay plan legislation passed a year ago in June 2017 because Metro can’t afford to provide the cost of living increases promised in that legislation.

It requires using rainy day funds to make ends meet.

It requires a one-time sale of $23 million of prime real estate to make ends meet.

It requires a one-time sale of $15 million in parking meter enforcement rights to make ends meet.

The fact that Metro is entering a multi-year budget crunch during boom times is making people mad — really mad. The citizens of Davidson County don’t feel right now like Metro’s spending matches its values. We have been told that downtown tourism is the economic engine that we need to pay for everything. But here we are having record tourism and a budget crunch, and not able to honor our obligations to our schools and our employees.

The situation calls for immediate action and long-term action.

On the long-term front, I am confident that the Metro Council is going to reassess how economic incentives are judged and awarded. Most citizens believe that downtown has enough momentum to be self-sustaining and they would like to see more tax dollars spent in communities outside of downtown. Unfortunately, any reassessment and realignment like this won’t happen overnight or in a single year.

In the short-term then, we must look at revenue and expenses and how to make ends meet while also honoring obligations to schools and employees.

On the expense side, I expect that the Council will be proposing many cuts to many items in the upcoming budget. We are too early in the process for me to have an idea of what those cuts will be. However, I am certain that there is not enough fat in the budget to cut that would allow Metro to honor its school and employee obligations. We have to look at the revenue also. This has been true historically, and it is true now.

On the revenue side, I along with other Council members are proposing a $0.50 property tax rate correction. This should have been done last year by the Mayor and/or the Council when the regularly-scheduled property value reassessment dropped the rate by $1.361. Adjusting the rate by $0.50 now would allow Metro to fund:

The school system’s requested budget (FY19)

Employee cost of living increases (FY19, 20)

Replenish Metro’s rainy day “5% funds” (FY19)

Pay known, already existing new debt obligations (FY20, 21)

Make up for the one-time sales of real estate and parking meter enforcement to cover budget this year (FY20, 21)

Cover minimal 1.5% growth in expenses (FY20, 21)

Remember, inflation is running at 2.5% — so planning for 1.5% growth leaves no room for error

This rate adjustment would only cover basic existing government operations until the next property value reassessment. It would not leave any room for funding for additional police or firefighters, and would not leave any room to provide additional funding for important programs like affordable housing.

To help show the numbers involved, here is a worksheet. Metro Finance provided the numbers for me. In four columns, it shows what “Status Quo” looks like until the next reassessment, then what funding the employee pay plan and adequately funding FY19 would look like, and then the last two columns add enough funds to cover minimal inflation of 1.5% and 2.0% respectively. Hopefully, the worksheet is self-explanatory.

In addition to correcting the property tax rate, it would be smart to ask Metro department heads to proactively find a way to operate 1-3% under budget in the upcoming year. This would further replenish Metro’s cash reserves.

These are some of the questions I am hearing about the proposed $0.50 property tax rate adjustment:

What is the proposal?

Adjusting the rate by $0.50 now would allow Metro to fund:

The school system’s requested budget (FY19)

Employee cost of living increases (FY19, 20)

Replenish Metro’s rainy day “5% funds” (FY19)

Pay known, already existing new debt obligations (FY20, 21)

Make up for the one-time sales of real estate and parking meter enforcement to cover budget this year (FY20, 21)

Cover minimal 1.5% growth in expenses (FY20, 21)

Remember, inflation is running at 2.5% — so planning for 1.5% growth leaves no room for error

This rate adjustment would only cover basic existing government operations until the next property value reassessment in 2021. It would not leave any room for funding for additional police or firefighters, and would not leave any room to provide additional funding for important programs like affordable housing.

A $0.50 rate adjustment is the minimum necessary for Metro to honor basic obligations to our schools and employees. More information is here.

Why is a property tax rate correction necessary?

As I have said in other posts, the “Metro government botched the…resetting of property tax rates last year.” In 2017, the Metro Property Assessor’s office ran its typically good property value reassessment process, but then Metro skipped making a simultaneous rate adjustment. This was out of step with historic practice in Metro and must be corrected. More info here.

Don’t we need a referendum to raise property taxes?

No. Under the Charter, we would need a referendum to raise the total property tax rate above $4.69. The proposal is for $3.655, substantially less than that cap.

Why propose this now?

The Mayor proposed a budget on May 1, and the Metro Council must approve a budget before the end of June. The budget process is the only opportunity to correct the property tax rate. The $0.50 adjustment is being proposed now to allow enough time for consideration before the budget is passed next month.

Why don’t we make corporations pay their fair share?

First, commercial properties pay approximately 62% of property taxes in Davidson County. Any rate adjustment will be paid primarily by businesses.

Second, I am confident that the Metro Council is going to reassess how economic incentives are judged and awarded in Nashville. Most citizens believe that downtown has enough momentum to be self-sustaining and they would like to see more tax dollars spent in communities outside of downtown. Unfortunately, any reassessment and realignment like this won’t happen overnight or in a single year. This rate adjustment is necessary for Metro to honor its immediate obligations while we address any inequity in economic incentives, which will take longer.

Does this impact the current election for Mayor?

I certainly hope not. While everyone should be sure to vote and not take anything for granted, I assume David Briley will be elected to serve out the last year in Megan Barry’s term. My sense is that the timing for suggesting a rate correction would be criticized by somebody no matter when the suggestion was made. Rather than trying to read the tea leaves on that, the timing is motivated to give the community as much time as possible to digest and analyze the situation before the Council votes on a budget in June.

The proposed FY19 Metro budget has been out for ten days now…and it’s not good…and this is just the first year of a multi-year problem.

The quick top line summary is that the proposed budget would renege on legislation passed last June for employee cost of living increases and gives our schools only $5 million of the approximately $45 million that MNPS asked for. And in order to fund this bare bones, mostly status quo budget, the budget proposes selling $23 million of “surplus” Metro property and getting a $15 million one-time payment for outsourcing parking meter enforcement. Finally, there is consensus that the FY20 budget will be worse and require budget cuts, probably across the board.

Why this is happening? There are many contributing factors, but the single biggest is that the Metro government botched the reassessment and resetting of property tax rates last year. I don’t want to get too wonky, but nearly every time in the past when Metro has done a property value reassessment (which is required by state law to be revenue neutral), Metro has also changed the property tax rate (which can increase revenue). These are usually done at the same time because the revenue neutral property value reassessment already changes everyone’s tax bill. When revenue is needed for a growing city, it makes sense to change the rate when everyone’s payment amount is already changing due to the reassessment.

But last year, Metro only did the reassessment. The reassessment caused the property tax rate in Metro to drop from $4.516 per $100 of assessed value (which was pretty low historically) down to $3.155 (which is an all-time historic low rate). In almost every other reassessment in the history of Metro, the city would have reset the rate somewhere between these two numbers, which would have increased revenue. The failure to do this last year is the biggest reason why funds are short this year. And because property tax reassessments are on a four year cycle, this is also why Metro will be squeezed for cash at least into FY20.

Of course, there were other factors. For example, there were a high number of assessment appeals from large commercial properties last year. Since a majority of property taxes are paid by commercial properties, this impact is real. Also, the State of Tennessee continues to underfund Metro’s school system. There is ongoing litigation by MNPS to try to fix this, but the budget impact on Metro continues.

Will tightening Metro’s belt on spending correct this revenue problem? I don’t think so, not completely. I mean — Metro definitely should cut any fat that it can. But the proposed budget is already getting into the seed corn just to make ends meet this year. Is Metro going to find another $23 million of real estate to sell in FY20 to make ends meet then? Even if Metro could cut enough expenses to fund promised employee raises and education this year, is there enough fat to do it again in FY20? It’s hard for me to make the math work on Metro cutting its way to a fully-funded budget.

What can be done to correct this problem? The Metro Council is only one week into our budget meetings. I am hearing lots of ideas about where to cut expenses. I think we will cut expenses, perhaps aggressively. There are going to be tough conversations about how far we can cut back without eroding important government services, hurting Metro employees, or shortchanging our kids’ education.

I will update you all as the budget process unfolds.

FUN FACT: The previous all-time low property tax rate was in 1984-85. The rate that year was $3.17. That lasted only one year. It was quickly corrected by 75 cents, up to $3.92 for the rest of that reassessment cycle.

Correction, May 21, 2018: Metro Finance says that the one-time sale of real estate is expected to bring in $23 million. This post previously said $38 million.

With the budget crunch this year, many people are asking legitimate questions about when and how tax increment financing (TIF) is used. Some of those conversations are getting bogged down in trying to understand exactly how TIF dollars flow. This post is not about the important questions of how and when to use TIF. This is a technical description of the flow of money in an effort to relieve some of the side questions about how it works.

What happens when MDHA provides tax increment financing? There are two key starting points to know. First, a baseline amount of property tax is established. If a property pays $10,000 per year in property taxes before the new development, that $10,000 is the baseline. When the new building is done, it will generate more taxes — say, $30,000 per year. The difference between the post-development tax bill and the pre-development bill is the “tax increment.” In my example, the tax increment would be $20,000 per year. Second, with TIF, it is MDHA that borrows money from a bank. MDHA then provides the loan proceeds to the developer. The developer will typically use the MDHA loan proceeds as part of its equity in financing a project.

Next, the project is built. The new building then gets its new, final property tax assessment. And then the owner pays the full amount of those property taxes to Metro just like everyone else. However, Metro and MDHA will have made a note of the baseline tax ($10,000) and knows to think about the baseline ($10,000) and the tax increment ($20,000) differently. More about that in a second.

Whenever Metro receives any property tax revenue, it automatically allocates the money to its several Funds — including the General Fund, the School Fund, and the School Debt Service Fund. This bears repeating — every dollar received including the tax increment dollars gets automatically allocated in certain fixed percentages to Metro’s various accounting Funds. When you pay your property taxes, about 41% gets allocated to the School Fund and the School Debt Service Fund, for example. And a TIF project works the same way — about 41% of its property tax payments get allocated to those same two of Metro’s Funds.

Then each year in the budget, each of the Funds has an expense line item where its share of the tax increment from TIF properties is deducted out and given to MDHA. Then MDHA uses this money to pay back the TIF loans.

This technical accounting flow of money among Metro and MDHA does not match up with the conventional perception of TIF loans. The common understanding is that Metro has decided to keep property taxes for TIF properties artificially low and that Metro never sees the money. While the end result that the tax increment is not available for typical government services is the same, the actual mechanism is different. Metro does collect the full property taxes on each TIF property, allocates the tax increment to its various Funds just like all other property tax revenue, then debits the tax increment money out of the Funds and over to MDHA, and then MDHA pays the loans.

As we wade into a budget season where people are looking for money, I know that some are seeing the budget line items for payments to MDHA and asking about it. Again, the sole goal here is to explain the mechanism. The more important long term question is about how and when to use TIF.

People in Nashville are understandably angry about having a tight budget in boom times. But this storm has been brewing for a while.

During the 2015 election season, one of the things that voters all around the county wanted to talk about most was “how come I’ve got problems in my part of town and we spend all that money downtown?” Voters have been ahead of the government on this. This budget season is making people wonder how they knew there was a problem and their leaders didn’t.

My comments in 2015 were centered around the ideas that: (1) economic development spending is not all “good” or all “bad”; and (2) there simply isn’t enough information available for even well-informed people to have any idea whether particular projects are a good use of funds or not. My argument then was that more information and more transparency would lead to better decisions.

I know I wasn’t alone in this. One mayoral candidate talked about these issues as his central platform, and another two had a heavy dose of these issues.

I also know I wasn’t the only Council member to hear these issues from the community. I’ve tried to make progress on this. My first legislation in office — along with 24 co-sponsors — was tax increment financing reform. The ordinance requires annual property-by-property detailed reporting about TIF projects by MDHA. This legislation also stopped the practice of using property tax dollars from one redevelopment district for projects outside the district. The fact that I had 24 co-sponsors sign onto this shows how much we heard about TIF from the community.

Last summer, I also passed legislation requiring Metro to have a more detailed “debt management policy.” Before this, Metro did have a written policy about how to decide the right amount of long term debt. But, paraphrasing, the previous policy was basically a few sentences that said “Metro considers many appropriate factors in deciding how much debt is appropriate.” The new beefed up written policy — starting at page 5/21 in this PDF — outlines specific factors to be considered and also for the first time acknowledges that Metro’s unfunded retiree benefits obligations should be considered when making decisions about long term debt. (More about the $3 billion unfunded retiree benefits obligations here.)

As a Council, we have also stood in the way of the downtown flood wall for these same reasons. I have felt and continue to feel that there is not popular support around the county for a $125 million downtown flood wall. This project might well be technically sound and perhaps needed to protect Nashville’s lucrative downtown business and entertainment district. But by the time of the 2015 campaign season, and continuing through today, voters have had it with what feels like opaque insider development decisions that mostly impact downtown. We shouldn’t spend that much money on a flood wall without addressing the underlying distrust issues that have been brewing for a while now.

During each of the previous two budget cycles, I have also raised questions about how the percent of the budget that Nashville spends on long term debt could be increasing while we have been in boom times. If your get a raise from $50,000 to $55,000 per year, you’d like to see the part of your paycheck that goes to debt decrease, not go up!! Voters maybe haven’t known the exact numbers…but they have known that something wasn’t quite right.

Back in 2015, these issues concerned me and I told voters that they raised a yellow flag, not a red one, for me. I often said that there was plenty of time to address these issues and make a course correction. The efforts I am describing with legislation, and in encouraging dialogue and consensus on the flood wall before pulling the trigger on a $125 million project, and in talking about Metro’s $3 billion unfunded retiree benefits obligations have all been to nudge the city toward the course correction that we need.

Now it is nearly three years later. The transparency added with the new legislation has been a critical first step. But now we need the data to drive decisions. While nobody wishes for a budget crunch or the other chaos of the last few months, maybe there is a silver lining. Nashville is fundamentally very strong. The current storm give us an opportunity to start the hard work and hard conversations we need to strike a new, better balance in how we deal with debt, development, and funding our retiree benefits.

Bill -983 is sponsored by 22 Council members and is set for 2nd reading in the Council tonight. The bill would create new reporting and enforcement mechanisms for economic incentives. I think the motivation behind the bill is great. I think big parts of it are great. But I voted against it in our Budget & Finance Committee last night.

Since the bill has 22 sponsors and passed Budget & Finance last night by a 10-2 vote, I wanted to explain my position against the bill.

The bills has four main components — it requires an incentive recipient to predict in advance of its project the number of jobs that will be filled by Davidson County residents and the wages that will be paid, it requires the predictions to be incorporated into the formal incentives agreement each recipient has with Metro, it requires quarterly reporting after the incentive starts, and it empowers the Council to cancel the incentive if the recipient fails to comply with the predictions.

As things stand today, every incentives recipient has a formal agreement with Metro, and there are different degrees of enforcement or claw backs built into each contract. Importantly, the Metro Council has to approve every incentives agreement before Metro can enter the agreement.

I am all in favor of standardizing the information we receive before an agreement is signed. I am in favor of continuing to strengthen the enforcement mechanisms in our incentive agreements. However, I don’t think it makes sense to shift enforcement from the executive branch to the legislative branch of Metro government. I don’t think it makes sense to have 40 Council members reviewing quarterly reports and also then deciding whether to pull the plug on the incentive agreement. I think it is much better policy for the Council to focus on our existing power to review and approve all of these contracts before they go into effect.

The pension fund is in good shape with more than 98% of the pension liability funded.

Metro’s future OPEB liability is not funded at all. Instead Metro pays its annual costs out-of-pocket each year. However, the unfunded accrued future liability has been growing faster than the annual budget for some time. The latest data out today shows that the combined accrued OPEB liability for Metro and Metro Schools is approximately $2.9 billion. We can expect this to cross over $3 billion during the current fiscal year.

Between now and the end of June, the Metro Council will approve our budget for the 2018 fiscal year. Before we get too deep into that process, it is worth remembering where Metro stands on its financial obligations to Metro retirees.

The financial obligations to retirees have two components – pension obligations and what is called “Other Post-Employment Benefits” or “OPEB.” The OPEB component is the health insurance coverage that Metro retirees have.

Metro has never set aside any money for the OPEB obligation. Instead, each year, Metro pays for the post-retirement healthcare obligations out of operating funds for that year. At the end of FY16, actuaries calculated Metro’s total unfunded OPEB obligation at $2.79 billion. There are several points to make about the unfunded OPEB obligation.

First, it is an enormous number. In fact, it was 1.4 times the entire Metro budget for 2016.

Second, this number has been growing rapidly. Back in FY12, the unfunded OPEB obligation was $2.23 billion. This means that, during Nashville’s historic growth from 2012 to 2016, the unfunded OPEB obligation grew by just over a half billion dollars ($560 million).

Third, there has been predictability in these numbers for the last 5 years. In both FY12 and FY16, the unfunded OPEB obligation was 1.4 times the Metro budget. The main takeaway is that, for every $100 Nashville has been able to grow its revenue/budget over the last 5 years, our unfunded OPEB obligation has grown $140. This is probably Metro’s worst financial statistic.

Here is a chart that shows Metro’s budget, unfunded OPEB obligation, and the OPEB obligation as a percent of the budget for 2012 to 2016.

I did the same analysis for the pension obligation. Here’s the chart for that. For the pension, there is money set aside already, although not enough to cover all future obligations. For the pension, the accountants calculate the “net pension obligation.” To do this, they look at how much money is set aside and then make some assumptions about inflation and how much money Metro will earn on the invested funds. Based on this data and assumptions, they calculate how much the shortfall will be over the long run. And that “net pension obligation” is how much Metro should anticipate having to pay for all current and former employees in addition to what is already set aside.

The good news is that the net pension obligation numbers are much smaller. For FY16, the net pension obligation was $401 million (or 20% of the FY16 Metro budget). That’s a big number, but manageable compared to the $2.79 billion unfunded OPEB obligation.

On the chart, you’ll see that it looks like the net pension liability quadrupled from FY13 to 14. But there was a complex accounting rules changes that went into effect that year, which forced the net pension obligation to be calculated differently. Since the rules change, the net pension obligation has ranged from 14 to 20% of the Metro budget. So for every $100 that Nashville has grown its revenue/budget over the last 3 years, the net pension obligation increased by just under $20.

It is hard to put just the right context on numbers this large — especially the $2.79 billion unfunded OPEB obligation. I mean, panic isn’t the right response. But, Metro does need a serious plan for addressing the trend lines. The Mayor just proposed a $2.21 billion budget for FY18. If that 1.4 multiple holds true, the unfunded OPEB obligation will go over $3 billion in 2018.

It seems like there are different methodologies being used to calculate a single metric. These numbers really aren’t too terribly different, but there is a roughly 10% swag factor depending on which of these is correct. I’m working with the various Metro folks involved trying to understand the differences.